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Swing Trading: Everything You Need to Know

Key Takeaways

  • Swing trading involves taking advantage of short to medium-term market movements to earn a profit.
  • Because swing trading is a speculative form of investing, the risk of loss is greater than it would be if you were aiming for long-term gains in a diversified portfolio.
  • Keep in mind: Active traders historically underperform the market.

What is Swing Trading?

Swing trading is an investment strategy where someone tries to profit from stock market swings ranging from one day to several weeks. Swing trading is a speculative strategy since investors are trying to time the market and profit from short to medium-term price shifts rather than long-term growth.

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How Swing Trading Works

Swing trading involves buying assets and holding them for a short amount of time — usually more than one day but not more than a few weeks — to earn a profit. Swing traders look to take advantage of price “swings”. Swing traders aren’t necessarily looking for huge profits. Instead, because of the short period they hold their investments, they aim to earn many small and medium profits that will add up over time.

Swing traders use technical analysis to make their trades. This type of analysis relies on statistical trends and market analysis, including past and current price movements and volume. Using that information, they try to make educated guesses about what will happen in the future. Unlike fundamental analysis, swing traders focus more on the market than on the company’s finances to guide their decisions.

Swing traders aren’t aiming for long-term profits. If an investment performs well and sees the swing the investor expected, they usually don’t hold onto it to see if it will grow more in the future. Instead, they take the win and exit their position to move on to the next swing trade before the price falls again.

Similarly, if a trade goes poorly and a stock price falls instead of rises, swing traders generally don’t hang onto it in the hopes it will turn around. Instead, they cut their losses and still sell within the normal trade window and move on to the next opportunity.

In fact, an important part of being a profitable swing trader is minimizing losses. Like other forms of speculative investing, swing trading will also result in losses. As long as an investor can ensure their profits outweigh their small losses, they have the potential to be successful.

Pros and Cons of Swing Trading

If you’re considering swing trading as an investment strategy, it’s important to understand all of the advantages and disadvantages.

Pros:

  • Swing trading can help investors take advantage of short-term market movement, resulting in quick profits.
  • Swing trading requires less of a time investment than day trading.
  • Swing traders are able to limit their investment losses using stop-loss orders.
  • Swing traders only have to look at technical analysis, not fundamental analysis.

 

 

 

Cons:

  • Swing trading is a speculative investing strategy, meaning there’s a high chance of losing money.
  • Swing trading isn’t a set-it-and-forget-it strategy, meaning it requires a greater time investment.
  • Because swing trading has a longer time horizon than day trading, the potential losses are greater.
  • Investors may miss out on the long-term market gains that buy-and-hold investors enjoy.
  • Swing traders are subject to short-term capital gains taxes rather than the more favorable long-term rates.

 

Day Trading vs. Swing Trading

Swing trading and day trading are both short-term investing strategies where individuals try to profit from short-term market movements rather than long-term growth. Both aim to earn small gains that outweigh their small losses to result in an overall profit. Both strategies also use technical analysis to make trading decisions.

The primary difference between swing trading and day trading comes down to how long investors hold their positions. As we mentioned, swing trades generally range from one day to several weeks. Day traders, on the other hand, generally don’t hold their positions for a full day. Instead, they make several trades throughout the day, buying and selling assets to take advantage of short-term market movement.

Day trading requires significantly more time and effort. Traders have to be constantly logged into their investment accounts to plan their next trade and exit their positions quickly. They often rely on advanced trading and analysis tools, while swing trading can simply be done in a run-of-the-mill brokerage account.

Swing Trading Strategies

Swing trading involves taking advantage of short to medium-term market movements to earn a profit. While swing traders generally use technical analysis for their trades, there are several specific strategies they can use.

  • Fibonacci retracements: This strategy uses technical analysis to find support and resistance levels. In other words, it seeks to find reversal points on stock charts where stocks tend to change course.
  • Support and resistance triggers: This strategy uses technical analysis to determine when a stock’s price is likely to be pushed in a certain direction.
  • Japanese candlesticks: Candlestick charts, which originated in Japan, acknowledge the influence that emotion can have on traders, while also accounting for supply and demand. They help traders determine future price movements based on existing patterns.
  • MACD crossover: Moving average convergence/divergence crossovers help swing traders to identify investment opportunities by looking at moving averages of a MACD line and a signal line.

Bull vs. Bear Market Swing Trading

Swing trading may look a bit different depending on whether it’s a bull or a bear market.

A bull market is one where prices are rising, often over an extended period of time. A bull market is an ideal time for swing trading since stock prices are generally moving up. You’re more likely to buy a stock and see the price increase over a period of days or weeks. And in this market, traders may be more likely to hold their positions for longer periods to maximize their gains.

A disadvantage of swing trading in a bull market is that because prices are on the rise across the market, it’s more difficult to find a good deal on a stock after liquidating your most recent position. Additionally, with reduced volatility, gains — especially short-term ones — may be lower (though losses are also lower and less likely).

Swing trading in a bear market can be a bit trickier. Stock prices are generally declining in a bear market, meaning you’re more likely to lose money on your trades. Because of this, swing traders tend to hold their positions for shorter periods in a bear market. That way, even if there are losses, they are lower than they might be if an investor held a stock longer.

Investors in a bear market may decide to employ a different strategy entirely. Rather than their normal short-term trades, they might try their hand at short selling, buying options instead of stocks, or putting some of their money into long-term trades until the market bounces back.

Is Swing Trading Really Profitable?

Swing trading has the potential to be profitable if you employ the right strategy. Like other forms of speculation, swing trading can often result in losses. The goal is to have enough successful trades and have those gains outweigh your losses to end up with a net profit.

Some factors that will determine whether you’re successful are outside of your control. You can make educated guesses about the direction a particular stock will move, but you can’t know for sure, nor can you control the stock market.

Your success will also depend on your trading strategy. Swing traders don’t simply blindly guess which stocks will rise in value. Instead, they use technical analysis to make the most informed trades. If you don’t do your due diligence, you’re less likely to make a profit.

Finally, your success will depend on the size of your trades and how long you hold your position. The more money you invest, the greater your potential gains and potential losses. It’s important to be wise with your trades to ensure you aren’t risking too much money. Remember, tools like stop-loss orders can help you minimize your losses to increase your chances of a profit.

How to Pick Stocks for Swing Trading

One of the most challenging parts of swing trading is choosing the right stocks to invest in. Swing traders use technical analysis, meaning they look at historical stock charts and trends to pick stocks they believe will increase in price over the course of days to weeks.

One of the most important characteristics swing traders should look for is volatility. When swing trading, the goal is to earn money from a stock price shift in a matter of days or weeks. A stock with no volatility at all isn’t likely to see much of a price increase in that time, meaning they may not be right for this strategy. On the other hand, a stock with too high of volatility might shift in price too quickly and would be more appropriate for day trading. Yes, you want to earn a profit. But you aren’t looking to make a lot of money on one trade — you’re looking to make a little bit of money on many trades.

Another thing to consider is the liquidity of each stock. Those stocks with a high trading volume will be easier to sell at your desired price when the time comes. On the other hand, low-volume stocks may be more difficult to sell, meaning you may have to take a lower price.

Finally, remember the goal of swing trading is to earn money by investing in a stock that rises in value. As a result, it may be wise to invest in those that are trending upward and outperform those in the same sector of the same relative size.

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Is Swing Trading Good for Beginners?

When it comes to the question of whether swing trading is good for beginners, the answer is: it depends. First, swing trading may be an approachable strategy if you’ve been investing in other ways for a while, but are a beginner at active trading.

Compared to other forms of active trading, such as day trading, swing trading is simpler to do. It takes less expertise, since you don’t have to watch the charts or analyze the market quite as closely. Additionally, it doesn’t require the same time investment that day trading does. Finally, swing trading has less risk than day trading.

But if you’re dipping your toe into investing overall for the first time, then swing trading probably isn’t the right strategy for you. Swing trading requires technical analysis, which can take some time to learn.

Instead of starting with swing trading or any other form of active trading, it’s probably best to start with a passive trading strategy like mutual funds or exchange-traded funds, which allow you to earn a long-term profit without being an expert in the stock market.

How to Start Swing Trading

If you’ve decided to start swing trading, the first thing you’ll need is a trading account. There are plenty of brokerage firms where you can swing trade, but it’s worth choosing one that has robust trading and analysis tools designed for active traders.

Once you’ve opened your brokerage account, spend some time familiarizing yourself with the trading tools. Swing trading requires technical analysis, so you’ll want to make sure you have a deep understanding of the market before you get started. During this time, explore some of the various swing trading strategies out there and pick one that works for you.

If you want a bit more practice before you get started, consider opening a paper trading account, which is essentially a practice trading account where you’ll buy and sell fake assets.

Once you’ve familiarized yourself with the trading tools and have maybe had a bit of time to practice in your paper trading account, it’s time to start swing trading. You can use the criteria above to choose which stock to start with.

Remember, swing trading positions are usually held for anywhere from one day to several weeks. During this time, it’s important to monitor your position so you know when it’s time to sell.

As you start swing trading, remember that you’ll probably lose money. Swing trading is a speculative investment strategy, meaning losses are common. The goal is simply to have gains that ultimately outweigh your losses. As you become more comfortable with this trading strategy, you may find that you have more success.

How Risky is Swing Trading?

Any time you invest money, you accept some level of risk in exchange for a financial return. Because swing trading is a speculative form of investing, the risk of loss is greater than it would be if you were aiming for long-term gains in a diversified portfolio. If you’re going to use any active trading strategy, including swing trading, you’re likely to lose money at times.

Rather than trying to avoid losses altogether, speculation requires that you accept those risks in the hopes that you accept those risks and minimize your losses so that your gains can outweigh them. The good news is there are ways to reduce your risks when swing trading, including by using stop-loss orders and investing with small amounts of money.

The good news is that it’s possible to take on the risks required for stock market investing without quite as much risk as is required for swing trading. The U.S. stock market has historically provided returns of 10% per year. Individuals can work toward achieving those gains by investing in a diversified portfolio. And while you may think you can beat a 10% annual return with swing trading, know that data has overwhelmingly shown that active traders underperform the market.

Ultimately, each investor must decide for themselves whether the risks of swing trading are worth it to them for the potential returns. On one hand, it’s possible to earn money with this strategy. On the other hand, you may be better off investing in a diversified fund portfolio and devoting your time to other things.

Interested in working with an expert on managing your financial life? Personal Capital’s fiduciary financial advisors can help you set up a diversified portfolio, prepare for retirement, and make life’s big money decisions.

Learn More About Personal Capital’s Wealth Management Services

 

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Erin Gobler is a money coach who helps people pay off debt and reach their big financial goals without giving up spending on the things they love.
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